Tuesday, October 22, 2013

Some time ago I wrote about the prospect of the U.S. economy going through a Canadian-style slump (see here). To summarize: The recession that hit Canada and the U.S. in the early 1990s was much more severe in Canada than in the U.S., and the recovery in Canada took almost a decade to complete. In 2008, the tables appear turned. In what follows, I plot the employment-to-population ratio for Canada from 1989:1 - 2003:1 and match it up against the same ratio for the U.S. beginning in 2007:1 - present. The parallels thus far are striking.

Let's start with the employment ratios (courtesy of my able research assistant, Li Li) for the whole population in both countries: (All starting points normalized to 100 -- the actual employment rates are close in any case.)

This shows that the slump, as measured by the drop in employment, was about the same magnitude for Canada in 1990-91 as for the United States in 2008-09. The recovery dynamic in both cases appears to be painfully slow.

Let's now decompose employment across various age groups.

In terms of young and prime-age workers, the U.S. looks a little more depressed relative to the Canadian experience. The experience of older U.S. workers seems less depressed (but the behavior of older workers since the mid 1990s is influenced by a change in secular dynamics, so perhaps should not be viewed as a recovery dynamic.)

Now let's decompose by age and sex. Here we have the data for adult men:

And here we have the age-sex decomposition for men:

The correspondence between those aged 20-55 (the bulk of the population) is very close. Here is the data for adult females:

And here is the age-sex decomposition for women:

The most recent U.S. recession is sometimes labeled a "mancession" in reference to the fact that men appear to have been particularly hard hit (my colleague Silvio Contessi and my RA Li Li talk a bit about this phenomenon here.) It is interesting to note that while this may have been the case, the data here suggest that U.S. females were nevertheless hit harder than their Canadian counterparts in the 1990s.

Just for fun, I asked Li Li to plot broad stock market indices: the TSX composite index for Canada and the S&P 500 for the U.S. (both series have been adjusted for inflation).

Anyone willing to bet against the EMH?

At this point, I'm not entirely sure how to interpret this data. My feeling is that something useful may come out of studying the Canadian episode in greater detail. Maybe a few Ph.D. students are willing to take up the challenge?

Thursday, October 17, 2013

Is the level of employment in the U.S. currently too low? To many people, the answer to this question seems obvious: of course it's too low, you moron.

But "too low" relative to what? Relative to historic averages? Employment seems low relative to recent history, but high relative to more distant history; see here. Moreover, secular employment dynamics across demographic groups often move in different directions, making the question even more difficult to answer. (Marcela Williams and I talk at length about the "many moving parts" of the labor market here.)

Maybe we can learn something by comparing the U.S. experience with Canada. As far as different countries go, Canada is about as "close" to U.S. as one can get. Moreover, as I've pointed out before, the Canadian economy experienced a great slump in the 1990s, a phenomenon that appears to be playing out now in the U.S.

Let me start by looking at the employment-to-population ratios across these two countries. (In Canada, the population constitutes those aged 15+, in the U.S., those aged 16+). Here is what the picture looks like for prime-age males:

Employment is similar early in the sample, but a gap emerges in the 1980s, growing even larger during the "great Canadian slump" of the 1990s. But for most of the 2000s, up to 2008, the employment gap appears to have vanished. Since 2008, the employment gap has reversed itself: the employment rate among prime-age American males is now significantly lower (2 percentage points) than their counterparts in Canada for the first time in about 40 years.

Can we use these employment gaps to infer something about the slowness of the U.S. recovery? I'm not sure. Well, we have to be careful. But this picture might make one more sympathetic to the idea that there is an "output gap" in the U.S. that's at least as large as the value-added associated with increasing prime-age male employment by 2 percentage points. (Of course, this says nothing about what the source of the gap is.)

What does this data look like for other age groupings? Let's take a look. Here's the picture for "adult" teens:

A lot of this employment must be in the form of part time work. The employment ratios are low relative to other demographic groups, as one would expect, but the two countries are quite similar here until about 2000. What happened?

Here we have young adult men:

The picture here looks similar to the one for prime-age males. Together, the two pictures above show that the recent recession hit younger men in the U.S. harder than their counterparts in Canada, and also relative to older men in general.

Let me now report what the same data looks like for females. For prime-age females, the picture is this:

For most of the sample, the employment ratios track each other fairly closely, with the Canadian ratio slightly below its American counterpart. Again, as with teenage men, something appears to have happened in 2000. The female employment rate appears to be in secular decline while, in Canada, it has remained elevated and stable. What are the implications of this recent divergence? And how should it be evaluated by policymakers? We need more data to answer these questions.

Here's the picture for teenage women. Again, a large cross-country gap emerges around 2000.

It is interesting to note that the upward trend in female employment is absent in this age category. It is also less apparent in young women:

But once again we see a significant divergence across these two countries beginning at around 2000. The recession in 2008 served to enlarge these differences.

Finally, for older women:

As with older men, older women seem largely impervious to the business cycle.

What is it that is leading older people to devote more time to market work -- seemingly at the expense of younger people? It is tempting to argue that the financial crisis, by wiping out retirement portfolios, compelled older people to work more to rebuild their lost wealth. But the trends here appear to have been in place since before 2000.

Sunday, October 13, 2013

Ah, a fine Sunday morning. Made the mistake of reading Wren-Lewis and Krugman. Usually they have some interesting things to say. But not always. And recently, they have said some rather strange things. Time to weigh in.

First, Simon Wren-Lewis complains (again) about something that may or may not have been true at one time:

My first complaint is that too many economists follow what I call the microfoundations purist position: if it cannot be microfounded, it should not be in your model. Perhaps a better way of putting it is that they only model what they can microfound, not what they see. This corresponds to a standard method of rejecting an innovative macro paper: the innovation is ‘ad hoc’.

"Too many" economists. Like who, Simon? Give us names! A long list of names.

I don't think he can do it. He can't because all economic models and theories embed ad hoc assumptions. (Btw, I've addressed this complaint before, here.) So why does he say things like this? I'm not entirely sure.

He seems to want to tell us that nominal wages are sticky, something that standard economic theory is evidently incapable of explaining, and that a set of economists belonging to some sort of commission have made terrible policy mistakes by ... um, refusing to admit that wages are sticky ... because economic theory cannot be used to support the observation? I am confused.

I am also confused about what the following statement has to do with his opening complaint:

While we can debate why this [the sticky wage assumption] is at the level of general methodology, the importance of this particular example to current policy is huge. Many have argued that the failure of inflation to fall further in the recession is evidence that the output gap is not that large. As Paul Krugman in particular has repeatedly suggested, the reluctance of workers or firms to cut nominal wages may mean that inflation could be much more sticky at very low levels, so the current behaviour of inflation is not inconsistent with a large output gap.

Now, let's see if I understand. Some economists evidently believe that the "output gap" cannot be very big because, if it was, we should be seeing deflation. Let me point out that the very concept of an "output gap" relies on the presumption of sticky nominal prices -- an ad hoc assumption forming a center piece of NK theory. So what Wren-Lewis appears to be saying here is that his ad hoc assumption is better than their ad hoc assumption. This may very well be true--but again, what it has to do with his original complaint, I have no idea.

No big deal. Wren-Lewis, who I think usually makes for a good read, was maybe a bit sloppy on this occasion. I can certainly relate. Let's just move on.

Oh, but no. Nope. My favorite curmudgeon has to take an unsolicited hand-off and proceed to let loose his canon (ha ha) here: Sticky Wages and the Macro Wars.

O.K, we get it. Nominal wages are sticky. But it is important to understand precisely what he means by this. In particular, he does not just mean that nominal wages appear not to move very much in the data. We can all see that. What he means is that the reason they do not move is beyond the comprehension of standard economic theory. He makes this explicit here, where he says:

I’ve written quite a lot about sticky wages, aka downward nominal wage rigidity, which is one of those things that we can’t derive from first principles but is a glaringly obvious feature of the real world.

Well, it is my humble opinion that he is just plain wrong. We've known since at least Barro (1977) that spot wages are not "allocative" in job-worker relationships, where bargaining (and not any auctioneer) determines the terms of trade and how these terms evolve over time (I discuss this at length here). In short, wages can "look sticky" empirically, even if they are not theoretically. Let me also refer you to this interesting paper by Eichenbaum, Christiano and Trabandt (2013). This latter paper belongs to a class of papers (see Hall and Shimer, in particular) who "microfound" price rigidities via bargaining theory. In a nutshell, the details of the bargaining process matter and this is something that is (deservedly) receiving a lot of attention by theorists. (I may be wrong, but I never see Krugman citing such work. Either he finds it uninteresting, or wrong, or ... ).

But enough of Krugtron. As for Wren-Lewis, I think his main message is for young economists: do not to be led into thinking that every macroeconomic theory needs to be "microfounded." That's fair enough advice. But by the same token, young economists should also not feel threatened or bullied into thinking a priori that social phenomena are beyond the reach of economic theory--especially when such sermons are delivered by bitter Nobel-prize economists still suffering from the intellectual wedgies applied to them in their youth.

Subscribe To

Favorite Quotations

"Believe those who are seeking the truth. Doubt those who find it." Andre Gide

The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it (P.J. O'Rourke)

But to manipulate men, to propel them toward goals which you – the social reformers – see, but they may not, is to deny their human essence, to treat them as objects without wills of their own, and therefore to degrade them (Isaiah Berlin)

I believe that sex is one of the most natural, wholesome things that money can buy (Steve Martin)

Nothing so needs reforming like other people's habits (Samuel Clemens)